Business is a quid pro quo. You give something, you receive something. The relationship of an owner and a tenant works on similar lines. However, it is a little bit more complicated than the simple buy and sell. It is a continued transaction, which extends to many years. Naturally, in any continued transaction, there could be some differences on several aspects of the relationship. But, it would be foolish to take the issue to the court each and every time there is a difference. Even arbitration is not an option. Therefore, it is imperative that one drafts the rental agreement carefully, and not just rely on a copy & paste job. More especially so in cases where the tenant is a business. The agreement shall equalize the interests of the owner and the tenant, while fulfilling both their needs. So here’s why you should be more careful about a rental agreement.
The why.
The rental agreement, also known as a ‘Lease agreement’, is a legal document. It outlines an arrangement between Lessor/Owner and Lessee/Tenant under which the rented property is leased out. If the arrangement reduces the agreed terms into writing, it safeguards the interests of both landlord and the tenant. Here are a few quick pointers as to why owners or tenants must ‘give it in writing’, or get it written from a lawyer.
- Usually the broker acts as a link between the owner and the tenant. He may not give a proper representation on his client’s behalf which could result into the confusion. This confusion may later on become the bone of contention.
- If there are not clearly defined rights and duties, any person could assume a right which the other party may not be comfortable with. E.g. the repair/ maintenance of property, access to the roof, etc.
- The elephant in the room- the rent. What components does the rent include- electricity, monthly maintenance, taxes? And what if the tenant refuses to pay the agreed amount? What if the owner starts demanding excess rent?
- The person running the business/ owning the property could change, and all of a sudden the verbal agreement with the old man in charge could be rendered meaningless.
- In case of a business, what if the business skyrockets and the owner starts demanding double the rent all of a sudden?
- Similarly, what if the property comes into a dispute? Who would the tenant pay rent to? How much rent does he pay?
These are some questions, although not exhaustive, that need to be answered in a rent agreement, and clarify all doubts once and for all. In case of any dispute, the parties to the rent agreement can easily refer to the agreement and resolve the problem then and there. This leads us to the next question, which will answer most of the doubts straightaway.
What are the important points which may be covered in rental agreements?
- Date of execution of the agreement
2. Name and details of the parties i.e. Lessor/Owner and Lessee/Tenant, like permanent address, email, mobile number.
3. Description of the property
4. While describing the property it is important to mention that the owner has absolute right and title over the property or if the person is authorized by way of power of attorney or any authorization letter then its detail shall also be mentioned.
5. Exact address of the property.
6. Description of the house, such as name of the apartment, floor number, area of the house, number of rooms, bathrooms, living area, kitchen etc. along with list of fixture and fittings of the property.
7. Period of Rent
Mostly the standard duration for the rent agreement is 11 months, which is done to avoid stamp duty and registration charges as according to the Registration Act 1908, section 17 the registration of a rent/ lease agreement is compulsory if the leasing period is for more than 12 months. As per section 49 of Registration Act 1908, unregistered rent/ lease agreement for the period of more than 12 months has no evidentiary value.
8. It should mention the commencement date and termination of the agreement.
9. Purpose of Lease
The agreement should clearly mention whether the agreement for residential purpose or commercial purpose. Rent, Security deposit and other charge
10. Exact amount of monthly rent and a clarification if the rent includes the maintenance charges.
11. Whether the rent amount also includes utility charges like electricity, water, gas, telephone, internet etc. or will be charged as per consumption.
12. Due date by which the monthly rent must be paid.
13. Payment of the property tax
14. Penalty for delayed payment of rent amount.
15. Amount of security/rental deposit and whether it shall be refunded interest free on the expiry of lease period or at the time of vacating the rented premises. Deduction of certain amount from the agreement in case of any damage caused to the property because of the tenant.
16. Will there be any increase of rent on subsequent renewal of the agreement, if yes then by how much?
17. Notices and Lock-in Period
18. The agreement should mention the minimum lock-in period. It is the period during which both the owner and tenant cannot terminate the agreement, unless mutually agreed upon.
19. Notice before terminating the agreement prior to expiration of Lease.
20. Ideally notices are served by way of registered post, it can also be served through mail, if there is a clause mentioning that notice given on the respective email id (as mentioned in the details section of the Lessor and Lessee) shall be considered valid as per the terms of the agreement.
A few boilerplate clauses that you shall not miss
- The Lessee/ tenant shall not sublet, assign or part with the possession of the rented property in whole or in part under any circumstances.
2. The Lessee shall use the rented property as per byelaws of housing, municipal and other local authorities.
3. The Lessee shall not affect any alterations or additions, whether structural or not, to the property without prior consent of the Lessor.
4. The Lessee shall not act, nor permit any act, in relation to the premises which maybe a source of annoyance, nuisance or cause damage or disturbance to the occupants of any neighboring premises or properties.
5. The Lessee shall for the duration of the lease period maintain the interior and all the fixtures and fittings at his own cost.
6. The Lessee shall at his own cost carry out minor day to day repairs, any major repairs unless caused due to the negligence of the Lessee shall carried out by the Lessor at his own cost.
7. In case of any damage caused to the said premises, the Lessor is entitled for compensation.
8. The Lessee shall permit the Lessor or his agent or representative with prior notice to enter the rented property for inspection at reasonable time.
9. The agreement shall contain a pet clause, to whether the tenant shall be allowed to keep a pet or not. If yes, a pet policy shall be introduced, outlining the conditions under which tenants may keep pets in the rented property.
10. Force Majeure clause providing waiver or suspension of rent and defining the events that would constitute a ‘force majeure’ and consequences that will follow if such event occurs.
11. Process of handing over the property after expiry of agreement
12. The rent agreement must mention about the dispute resolution jurisdiction. This will be helpful in case of disputes between landlord and tenant.
You can stipulated more terms and conditions depending upon the peculiarities of the demands of both the parties. As an advocate, one must be fair and reasonable while prescribing terms and conditions. The agreement should not unfavorably position either of the two parties.
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